Edited version of private ruling

Authorisation Number: 1011579973220

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: home office expenses

Are you entitled to a deduction for occupancy and running expenses for an area of your home as a place of business?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a business development manager.

You are an employee and attend the factory for meetings on a fortnightly basis but do not have an allocated space to work from.

You require significant storage space for your products as well as an area to run your office.

You have worked from home for approximately 12 months.

You previously had space in your factory to do your job however when your company relocated your position became home office based.

You changed residences to accommodate your work requirements.

Reasons for decision

Summary

As your home is considered a place of business you are allowed a deduction for a portion of your occupancy and running expenses.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Normally, costs associated with a taxpayer's home are of a private or domestic nature (Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435) and do not qualify as allowable deductions because they do not satisfy the requirements of section 8-1 of the ITAA 1997.

However, in circumstances where a taxpayer is using part of a home for work purposes, a deduction for a proportion of costs associated with the home may be allowable.

Taxation ruling TR 93/30 provides the Commissioners view on the deductibility of home office expenses and specifies that:

· Costs associated with a taxpayer's home which can be linked with work conducted from the home are categorised as either occupancy or running expenses.

· Where the part of the home being used for income earning activities has the character of a place of business, a proportion of both occupancy and running expenses will be allowable deductions.

· Where part of the home is used in connection with a taxpayer's income earning activities as an employee, but does not constitute a place of business, only a proportion of the running costs will be an allowable deduction.

In the latter case, the area of the home being used is considered to be a private study or an office of convenience; as opposed to a place of business.

Occupancy expenses

Occupancy expenses are those costs related to ownership or use of a home and are not affected by the taxpayer's income producing activities. These include rent, mortgage interest, repairs to the home, municipal and water rates and house insurance premiums.

If the area of the home being used has the character of a place of business, occupancy expenses associated with that part of the home take on a business or business like character and a proportion of those costs are allowable deductions under section 8-1 of the ITAA 1997 (TR 93/30, paragraph 16).

Running expenses

Running expenses are those costs related to the use of facilities in the home which may be affected as a result of income producing activities. That is, the expenditure actually incurred through the income producing activity is additional to the taxpayers private expenditure (TR 93/30, paragraph 19). Such costs include heating, cooling and lighting expenses, cleaning costs, depreciation, and the cost of repairs of furniture and furnishings in a private study or office of convenience.

To claim any additional running costs relating to a private study or office of convenience, a taxpayer must be able to show that the extra costs incurred relate to facilities provided exclusively for the taxpayers benefit while working from home.

In most cases the amount of the allowable deduction will be small and apportionment of costs incurred is necessary.

Place of business

Whether an area of a home has the character of a place of business is a question of fact which depends on the particular circumstances of each case. This is likely to be the case where a part of a residence is set aside exclusively for the carrying on of a business by a self employed person; or where part of the home is used as a taxpayer's sole base of operations for income producing activities (for example, where no other work location is provided to an employee by an employer).

Paragraph 5 of TR 93/30 sets out the following criteria, none of which are necessarily conclusive on their own, to be considered in determining whether an area within a taxpayers home has the character of a place of business:

· the area is clearly identifiable as a place of business

· the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally

· the area is used exclusively or almost exclusively for carrying on a business, or

· the area is used regularly for visits of clients or customers.

Paragraph 13 of TR 93/30 states that a place of business will only exist if:

· it is a requirement inherent in the nature of the taxpayers activities that the taxpayer needs a place of business

· the taxpayers circumstances are such that there is no alternative place of business and it is necessary to work from home, and

· the area of the home is used exclusively or almost exclusively for income producing purposes.

Private study/office of convenience

Paragraph 14 of TR 93/30 states that the circumstances where part of a home is considered to have the character of a place of business can be contrasted with the more common case where a taxpayer maintains an office or study at home as a matter of convenience (that is, so that he or she can carry out work at home which would otherwise be done at his or her regular place of business or employment).

In these circumstances the area of the home being used, and the occupancy expenses related to ownership or use of the home, retain their private or domestic character (Forsyth v. FC of T 81 ATC 4157; (1981) 11 ATR 657 (Forsyths case) and Handley v FC of T 81 ATC 4165; (1981) 11 ATR 644).

In Forsyths case, the Commissioner appealed a decision by the Federal Court to allow a deduction for rent associated with the use of a room within a taxpayers home for work purposes. The Commissioners appeal was allowed with the High Court ruling that the expense of the rent was not deductible because the cost was domestic in nature and was not an outgoing incurred in gaining or producing the taxpayers assessable income. In this case, the facts that the taxpayer had a place of business away from his home where he normally carried out his work and chose to conduct work at home as a matter of convenience were factors in the High Courts decision.

Application of the law to your circumstances

If an area of the home has the character of a place of business as per the criteria set out in TR 93/30 then a portion of occupancy expenses and running costs under section 8-1 of ITAA 1997 will be allowable deductions. However, where an area of the home is simply used in connection with a taxpayers income producing activities but does not have the character of a place of business, then only additional running costs attributable to the income producing area of the home will be allowable.

In your case, you are a business development manager who performs their duties from home. Your employer does not provide you with an office on the factory premises. It is requirement inherent in the nature of your role that you need an office and storage space in order to fulfil your role. Although your work area may be readily adaptable to private purposes or clearly identifiable as a place of business on the weight of factors it is considered that the area you have set aside in your home to perform your income earning activities is a place of business. As a result you can claim a deduction for a portion of your occupancy as well as running expenses.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).